Unintended Consequences, Predictable Reactions, Part II

 As I was digging in for a long bout of reporting to dig into some of the numbers behind Tony Kennedy’s piece in the Strib last week, I noticed that David Brauer at the MinnPost had already done the job.  Read the whole thing; it finds, as I’ve always found in digging through think tank material on charter schools, that there is a lot of carefully-jiggered context and punctiliously-selected facts.

One example:  the Strib piece trumpeted a “3600 percent increase in lease aid”.  Brauer added a helpful bit of context (and I’ll add some emphasis):

Given the front-page headline (“Junk bonds fuel a building spree …”), readers could be forgiven for assuming that charter construction was the big factor behind lease aid soaring 3600 percent in 15 years.

But the building boom had little to do with the spending boom. Here’s what did:

“Charter lease aid sees fast rise in use” because charter enrollment is rising fast. Since 2004, lease aid has been capped at $1,200 per pupil unit. (The state weights pupils based on their grade level; kindergarteners lower, high schoolers higher.)

Though a few schools are grandfathered in at a higher amount, the $1,200 cap hasn’t budged since ‘04, and you can see the impact on average per-pupil aid:

Unfortunately, when it comes to owning infrastructure, “economy of scale” becomes an issue.  It’s one of the reasons that the big public school districts have consolidated rural schools and abandoned neighborhood schools in the cities; it’s cheaper, in some ways, to run one building for 1,200 students than six buildings for 200.  As the administrative overburden on schools increases, there’s been an inexorable push to centralize more schools, build more, bigger buildings…

…which, I maintain, has been a huge problem for public education.  While the link between large classroom sizes and academic performance is arguable at best, I strongly suspect (but am unaware of any hard data at the moment) that big schools breed huge problems.  The anonymity of huge schools (like Saint Paul’s Central High, with around 2,000 students) makes it easy for a student to get lost in the shuffle, to feel disconnected and uprooted (I’m writing from the experiences of at least one of my children, here). 

One of the programs that public school supporters constantly bring up in support of public schools is the “International Baccalaureate” (IB) program.  IB programs do indeed get good results.  Part of it is that they focus their efforts on the kids who do excel at the “sit your butt in the chair, do what you’re told when you’re told to do it, and spend your evenings doing homework” model of education.  Not everyone works well in that kind of system – I’d have floundered – but the other key factor is IB programs are smaller.  At Central, the IB is a “school within a school”; all the staff know all the kids, and vice versa; it’s the rough equivalent of a smaller neighborhood school, substituting an intellectual “neighborhood” (the “elite” nature of the IB student base) for a traditional neighborhood. 

Which is one of the beauties of the charter system; when my ex-wife and I pulled our kids out of the Saint Paul schools, they ended up at charter schools with less than 200 kids each.  All the staff knew all the kids, and most of the parents; the parents largely got to know each other and many of the kids.  Most importantly, the kids felt they belonged to a larger group – something kids seek out instinctively. 

They certainly seek it out at the big factory-model schools; if the school or an athletic team or a church group doesn’t provide it, they’ll find it in the form of “the wrong crowd”; gangs, or whatever social circle is convenient; in a huge school, which is almost purpose-designed to alienate kids who don’t get with the program, there are plenty of alienated, disaffected, “dropped-through-the-cracks” kids to fall in with.

After dealing with that, a charter school was a blessed respite of sanity.

So when a school opts to try to build itself a permanent home base, through the thin loophole allowed in state law, by affiliating with a construction company, several things happen.

  1.  The school floats a bond issue.  Since the bonds are for a small organization, they are not rated by Moody 0r Standard and Poor – hence, they’re called “Junk Bonds”.
  2. Being “Junk” bonds, and because a charter school can’t pass a tax levy to make the payments, the interest rates are higher. 
  3. Since the interest rates are higher, there’s an imperative to get more revenue through the door, to buff up the cash flow. Since “lease aid” is capped at $1,200 per student per year, that means that to have enough revenue to both build the buiding and service the debt, they’ll need to get more students into the building, to get more of those $1,200 allotments.

Which drives up class sizes.

To lure the investors they need for new buildings, some educators are abandoning the intimate campuses their founders envisioned and are building large schools that look more like the conventional institutions that some families are fleeing. Some charter school advocates say the build-your-own trend could undermine an education movement built on small class size and parental involvement.

“It destroys the intent and initial purpose behind all of it,” said Paul Simone, director of the Math and Science Academy charter school in Woodbury, a National Blue Ribbon award winner under the No Child Left Behind Act.

But the problem isn’t “the charter school movement”.  The problem is the laws under which charter schools have to operate.  They are public schools in every way except their individual “corporate” governance; they use public money, but are controlled by a site-elected board. 

But when it comes to real estate, they are hamstrung by the unintended consequences of a law that not only puts them at a big economic disadvantage to public schools, but to private and parochial schools as well.  Public schools, being big public entities backed by big taxing authority, can float bonds at very advantageous rates; parochial schools operate with the tax advantages, as well as demographic strengths (and weaknesses) of a faith community; private schools can charge whatever tuition the market will bear, are less restricted in terms of fundraising, and the big ones can build endowments.

So why not allow charters to piggyback onto public bond issues, to build their buildings at the vastly lower interest rates that this would allow? 

Or why not allow charter schools to lease vacated public school buildings from their local districts?  Policies on this vary from district to district; some allow it, others don’t.

Why not, indeed?

For purposes of the Strib’s “investigation”, and the non-profits like MN2020 who have charter schools in their crosshairs, it’s because the goal isn’t to make charter schools viable; it’s to kill them off.

Friday: Coincidental similarities?

14 thoughts on “Unintended Consequences, Predictable Reactions, Part II

  1. But Mitch, the benefit of those huge industrial schools is that you get so much more diversity! Just think of the exposure to new role models kids get and the effects that gives!


  2. With all due respect Mitch to your criticism of the Strib piece, and noting that I think Charter Schools can be wonderful, I disagree with something you wrote in Part I that I think affects understanding your subsequent points.

    You wrote:”“Junk bonds”.

    The technical definitino of “junk bond” is a bond that isn’t rated by any of the big ratings services – Moody’s or Standard and Poor. It doesn’t mean – to someone in the bond business – that a bond is bad, or good for that matter; merely that it’s un-rated. Of course, rated bonds are generally considered safer than unrated ones – which is why the unrated, “junk” bonds have to pay higher interest. ”

    Junk bonds are bonds that are not considered investment grade, they are considered speculative. That DOES tend to reflect something about a bond being good or bad; it is riskier. So much riskier that many kinds of institutional investor entities are prohibited from investing in them – banks, insurance companies, pensions, etc. It is not simply ‘unrated’.

    Junk bonds are called that for in some cases very good reason, and they too often (but not always) deserve the pejorative connotations. It requires someone very savy in understanding bonds to evaluate the value and substance of any junk bond issue. I don’t by any stretch claim that expertise, but I’ve had a lot more exposure to sources that do to at least appreciate some of the distinctions.

    However well intended, I think you perhaps either misunderstood or misrepresented the significance of junk bonds in this discussion.

  3. Dog Gone…what’s your point? …other than to define junk bonds?

    They are junk (unrated or low-rated) bonds because they aren’t issued by an entity that has the ability to raise taxes to meet the obligation represented by the bonds, unlike the traditional school districts.

    That by the way is the only reason American bonds still have a AAA rating even though America is essentially insolvent, but I digress.

  4. DG,

    That was how my source – a person with considerable experience in the field – described Junk Bonds.

    And since Roosh works in the field, I’ll take his word for it as well.

    Objection overruled.

  5. DG,

    Nope. I didn’t misunderstand what “junk bonds” meant for purposes of this discussion…

    …because the purpose of the discussion is to show how the Strib uses an inflammatory, often-misunderstood term to create a prejudiced impression of charter school financing.

    The the intent of the Strib’s piece, I argue, is to create an impression that charter schools that build their buildings in this manner are therefore acting irresponsibly. While it’s possible that some may act irresponsibly on a case by case basis, the Strib article tries to make the impression that floating these higher-risk bonds is itself shady.

    Just ain’t so.

  6. Master of None Says:

    December 10th, 2009 at 12:42 pm
    ” I’ve had a lot more exposure to sources that do”

    Let me guess…..Peeve’s next door neighbor?”

    Nope. Someone who was a leading consultant for getting bonds issued for municipalities, etc. Not exactly a subject that fascinated me at the time, but because a measure of politeness was to pay attention and ask intelligent questions I listened – and learned a bit about the subject in spite of my lack of shall we say a more sincere interest, over an approximately 2 year period.

    When Mitch says “1. The school floats a bond issue. Since the bonds are for a small organization, they are not rated by Moody 0r Standard and Poor – hence, they’re called “Junk Bonds”.”

    I would respectfully suggest that there is more to the reason bonds tend to be rated as ‘junk’ besides being small or not levying taxes, including lack of equivalent information about them. While it is true that Moody’s and S&P may not rate them, there are other ratings organizations that do rate them, and special high yield bond market indeces for them. Mitch also failed to mention the significant point that there are significant problems with these bonds being issued in packages similar to the way sub-prime mortgages are marketed, or that the market for these bonds is associated with manipulation. He also fails to mention that part of the problem associated with the Miliken scandal, an aspect that I suspect comes into play here, is that originally this kind of bond pre-Milliken, referred to bonds that were decently rated when they were issued, but then later experienced a rating decline. What Milliken did – and I suspect these bonds – are typically issued without ever qualifying for that higher rating, and are therefore as a general thing viewed as more suspect.

    Also Mitch failed to mention that periods of recession tend to result in a greater frequency of default; so as general rule of thumb (not addressing these specific bonds because I am not familiar with their details) it is not a good thing for junk bonds as an option in the current or recent (say back to 2007) economic environment.

    I would respectfully suggest that Mitch’s description understates significantly the risks and other applicable factors associated with this kind of finance.

    Just curious, but “Roosh works in the field”……..I’m curious, what licenses or certifications does he hold? Has HE ever handled the underwriting of a bond issue?

  7. “Dog Gone…what’s your point?”

    Roosh, you know better, it is a tactic of Liberal Fascists to distract people from the matter at hand. Peevee tries it all the time.
    Like they say, water seeks its own level.

  8. Mitch or Roosh, what is your experience in the bond market? Have you invested in junk bonds personally?

    Second question, what was the reason for the failure of S&L’s in the late 1980’s? If junk bonds aren’t risky, why were there so many failures, what caused the junk bonds to fail?

    I work in banking, not bonds, but as I understand junk bonds are technically defined as any bonds rated lower than BB (double B). There may be small bonds issued which are unrated – perhaps that’s so in this case, but you (nor I) don’t know that they are using THOSE bonds as opposed to poorly rated ones. However, even small bonds typically tie to small parties against whom they are issued. Small entities = more risk as they have less deep pockets normally. For example, a municipality MAY issue a bond – if it were so small that that the munipality were unrated – then there is clearly a risk that, since it’s small, it has less cash in reserve etc.. and thus there is a higher risk. Is this universally true, of course not, but any small issueance, just like penny stocks, implies a less stable underlying entigty

    MoN – my neighbor is an insurance agent, I’d no more listen to him about bonds than I’d listen to someone who works at an investment company in their mailroom. He’s a nice guy, and has some experience in life insurance but he’s no expert on bonds. Conversely, a friend of mine worked as an analyst for first Dain Raushcer (sic?), then as a VP heading the IT investment division, then as a fund manager for First Star and then USB, and then headed a hedge fund. I would look to his expertise long before I’d look to a blog – including the one I write.

    If HE gave me advice about what bonds were or weren’t, I’d listen – if Roosh has that level of experience, then I’d listen to him too. However, I have NO idea what Roosh’s expertise is.

    I think I’ve made plain in the past why I feel Roosh’s comments may well be biased and spun (such as claiming that CRA caused our current economic crisis). He seems likely to say whatever seems like will provide cover for his political party/position OR to back his blog co-author. While I don’t mean to imply a lack of integrity, I will say that it feels like he’s willing to spin things – which is hardly different than what Mitch is accusing the Strib writer of doing. Claiming that junk bonds are ‘fine’ because they may be small issuance is spin – they MAY be, but they also MAY be speculative, poorly rated bonds, and you have no idea which is being used.

    So, to put it to rest, I’ll ask my expert, and let you know – just as Mitch has asked his. I’ll ask him his opinion of using junk bonds as a source of funding/collateralization to build these schools (which is what I understand is going on), and let you all know.

  9. I am a little surprised that there would be such heat here over Charter Schools becoming involved with junk bonds.

    Junk bonds are higher risk, speculative financially. I would argue that however innovative it may be to end run the existing restrictions this way, it puts Charter Schools in a bad position to have to resort to them. If one of the junk bond deals goes badly…….how does that affect those schools?

    Charter Schools should have a greater equality with the other public schools in establishing their location. They shouldn’t have to scounge a building, or lease a bad or undesirable facility to do the work they do of teaching children.

    I would argue that they deserve a greater degree of respect for what they are able to accomplish, instead of being treated with what appears to be less consideration and support than more traditional / mainstream schools.

    Which suggests to me that the problem is more significant elsewhere than the Strib article.

    I would think that POV should put us on the same side, not in opposition.

    “Objection Overruled!” Sheesh, Mitch, what’s next? “Off with her head?”

  10. DG,

    One of my real points is that the “Junk Bond” bit is an “unintended” consequences of a really dumb rule. Change the rule.

    After overruling objections, I move to contempt of court.

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